Venezuela: It's not over till it's over

Nomura | Country Views

10 December 2012

Country Views Emerging Markets Research | LatAm

10 DECEMBER 2012

Venezuela: It's not over till it's over Regime change is closer, but it is far from a foregone conclusion.

Despite coming back from Cuba in apparently good health and positive spirits early Friday, President Chavez announced Saturday night that he needs to undergo emergency cancer surgery. We think the latest event increases the chances of the opposition getting into office, but we still expect the “Chavismo without Chavez� to be electorally competitive.

Fixed Income Research Strategist

Boris Segura +1 212 667 1375 Boris.Segura@nomura.com This report can be accessed electronically via: www.nomura.com/research or on Bloomberg (NOMR)

The succession rule: Running out of time for a Constitutional referendum According to the Constitution's article 233, if the President is permanently unable to serve in office within the first four years of his term, the VicePresident takes office, but has to call snap elections in 30 days. If that happens before next January 10 (the start of the next Constitutional term), the President of Congress takes over, but has to call early elections, also in 30 days.

This succession provision is due to the fact that the Vice-President is not an elected post, but appointed by the President himself and removed at will.

Our base-case of the chavismo calling for a referendum to change this succession provision right after the gubernatorial elections this coming December 16 was pretty much discarded by President Chavez himself, as he insisted that Nicolas Maduro was his successor for any possible election taking place in the short term. He had already been elevated to the VicePresident post, so his appointment does not come as a surprise to us (Venezuela: Succession in motion?, October 11 2012). However, we cannot rule out the possibility that President Chavez does table in such a referendum, if he takes office next January 10.

In case the succession takes place according to the current provisions, we doubt that elections would take place within the mandated 30 days. There Fig. 1: Public appearances by President Chavez Minutes 2500

Fig. 2: Venezuela: Primary spending, in real terms 12mms, % y-o-y

Government acts Campaign acts

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Source: Add Source Here Nomura Securities International Inc.

See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures

Nomura | Country Views

10 December 2012

is much at stake, and even the opposition would need more than 30 days to sort out its internal struggles.

President Chavez’s last wish?

Since announcing his illness in June 2011, details about President Chavez's health have been kept secret. During all this time, as is typical of cancerstricken patients, President Chavez's health has had its ups and downs. On at least two occasions, Mr. Chavez has declared himself cancer-free, only to admit afterwards that cancer had returned.

Right after winning the October 7 elections, President Chavez progressively left the scene, something uncharacteristic of him (Figure 1). He acknowledged the need of resting after a grueling campaign to get ready for his upcoming term in office. But being mostly absent from the scene for most of October and November, he requested authorization from Congress to travel to Cuba late last month to receive treatment.

The fact that he came back from La Havana just to turn back in less than two days suggests the seriousness of his illness and markets have reacted. As he officially appointed Nicolas Maduro as the chavismo standard bearer, we think this sets in motion “the Chavismo without Chavez”. We do not view this event as the end of the chavista movement. The fact that Mr. Chavez appointed a successor bodes well for the chavismo, as it avoids a potentially divisive succession struggle inside the movement.

The opposition's candidate The opposition‟s candidate for an eventual snap election will be pretty much determined by the results of next Sunday's gubernatorial elections. The frontrunner at this point remains the defeated candidate from last October 7's elections, Henrique Capriles Radonski (HCR). However, our view is that HCR lost a great opportunity to become the real national leader of the opposition by opting to run instead for re-election in Miranda State (Venezuela: Going back to Miranda? 9 October 2012).

In addition, we would like to point out that the opposition is still reeling from its most recent electoral defeat. There was certainly finger pointing after the defeat, and heavy criticism was leveled at HCR for the way he conceded Fig. 3: Venezuela: Permuta/black market FX

Fig. 4: Venezuela: Volumes in Sitme (daily average)

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Source: http://dolar-permuta.com/dolar

defeat on election night when, for example, he did not denounce the government‟s relaxing of electoral rules on its way to re-election.

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Nomura | Country Views

10 December 2012

Slam dunk for the opposition?

In principle, we think the latest developments get the opposition closer to power and the market will get its long-awaited “regime change”. We think this is the case as Nicolas Maduro does not have President Chavez‟s political star and, thus, the chavismo is more vulnerable vis-à-vis the opposition in an upcoming election.

However, upon closer examination, we think that the market should temper its enthusiasm in the medium term. First, we would not underestimate the emotional aspect of the chavismo trying to fulfil its leader‟s last wish to hold onto power. Second, the situation inside the opposition is not a “bed of roses”, as there are ongoing contradictions and a certain lack of morale.

Recall that the opposition‟s campaign created the allure of a big victory during the last Presidential campaign, only to lose by a non-negligible 11point margin (Venezuela: It was not even close, 8 October 2012).

Policy inaction From an economic policy viewpoint, President Chavez‟s absence is likely to bring policy inaction which, given Venezuela‟s deteriorating fundamentals, is a mixed blessing, in our view.

On the one hand, the sharp growth of primary spending is already showing signs of abating (Figure 2). However, there is a growing sense of urgency in terms of a currency devaluation to plug the fiscal hole incurred before the October election. We were expecting such a move right after the gubernatorial elections, but now think it is going to be delayed.

On the other hand, there is a sensible shortage of dollars in the economy, which began to manifest itself in the run up to the October elections. In particular, the black market in FX began to unravel even before the elections (Figure 3). In turn, the authorities‟ response has not been reassuring. For example, after the October elections passed, the central bank slowed USD supply via Sitme down to a trickle (Figure 4). The long-expected supply of USD bonds payable in bolivares has not materialized yet.

Strategy implications We sense that, in the short term, Venezuelan bond prices are likely to be well supported, as the market prices in more aggressively the “regime change” hypothesis. We would not be surprised if Venezuela‟s 5yr CDS collapses closer to the 500bp mark (Figure 5). However, in the medium term, we expect more volatility and potentially downside to asset prices, as that hypothesis is far from a foregone conclusion.

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10 December 2012

Fig. 5: Venezuela: 5yr CDS bp 1300

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Nomura | Country Views

10 December 2012

Disclosure Appendix A-1

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